The company produce a set of financial statements that reflect their business activity and profitability for each reporting period. The three key financial reports balance sheet, income statement and statement of cash flows. A report on the cash flows indicates how effectively a company manages its cash to Fund its operations, and any attempt at expansion. In this article we will look at the differences between the balance sheet and statement of profit and loss.
The balance sheet shows the company’s assets, liabilities and equity. Total assets must equal the sum of liabilities and equity. The balance sheet shows how the company puts its assets to work and how these assets are financed, as specified in section obligations. Equity is the difference between assets and liabilities, or money left for shareholders if all debts were repaid. Investors and creditors analyze the balance sheet to see how the company’s management invests its resources in the work.
To better analyze the key areas of balance and what they tell us, as investors, we will look at an example.
Following is the balance sheet of the company Apple, as of the end of the fiscal year in 2017, from their annual 10K statement.
The top section contains current assets short-term assets that are typically used in less than one year.
- Total current assets were 128.6 billion at the end of the fiscal year (highlighted in blue).
- Funds amounted to more than $20 billion.
- Marketable securities short-term investments, which totaled $54 billion.
- Receivables, for a total of $17.8 billion is money owed to Apple for the sale of its goods and services. Receivables can be due in 30, 60 or even 90 days depending on the terms of the contract. Investors want to see accounts receivable increases over time, because it means increased sales. However, we do not want to see the aging of receivables.
- Reserves in the amount of $4.8 bn may be raw materials or materials used in the manufacture of products or finished products waiting to be sold or shipped.
Further, in the balance sheet long-term assets, such as
- Long-term investments amounted to $194.7 billion.
- Property, plant and equipment amounted to $33.7 billion and are called fixed assets because they are not consumed within one year and are used to generate revenue for the company in the long term.
- Other assets and intangible assets , which include trademarks and intellectual capital in the asset section.
- Total assets for Apple was $375 billion at the end of the financial year in 2017.
Current liabilities-current liabilities for Apple, which for one year and include:
- Current liabilities amounted to $100 billion (highlighted in purple).
- Accounts payable totaled $49 billion and short-term debt obligations by Apple for its suppliers.
- Accrued expenses of $25.7 billion-a cost that must be paid, but have a high probability of being paid.
Not all long-term liabilities embossed for Apple, but they generally include:
- Debt including long-term debt and debt to banks, which amounted to $97 billion for Apple.
- Rent, taxes, utilities,
- Wage arrears,
- The dividends To be paid.
- Retained earnings for Apple was $98 billion, and the money is not paid out as dividends, but the company will reinvest in its business or to repay the debt.
- The share capital of the companies is equal to total assets minus total liabilities and is useful in calculating financial health of the company. Equity represents the net worth or equity of the company, which for Apple amounted to $ 134 billion. Equity is the money left after repayment of all obligations, such as debts in case of liquidation and the sum will be returned to shareholders.
Statement of profit and loss referred to the statement of profit and loss statement shows revenues, expenses, and expenditures for the period, which is usually a quarter or fiscal year.
The report on profits and losses provides investors with the ability to generate a profit or loss for the period. In addition, the statement of profit and loss statement provides valuable information about income, sales, and expenses for the company.
J Company Inc. (JCP)
The following is the statement of profit and loss as at the end of the fiscal year in 2017 from the annual report of J. 10K.
The upper section includes the total revenue or sales for the period.
- Net sales, also called the company, amounted to $12.5 billion in 2017. Income and sales are considered to be the top line for companies, as they are at the top of the statement of profit and loss.
- Cost of sales totaled $8.1 billion and represents the cost of production of goods and services during the period. Teeth direct costs and only the costs that are involved in the production process.
- Selling, General and administrative expenses, other expenses not directly involved in the production. For K. penny, SG and amounted to 3.4 billion dollars.
- Total expenses amounted to $12.39 billion for the year.
- Operating profit was $116 million after subtracting total costs from total revenue.
- Net interest expense in the amount of $325 million-for the costs of servicing the debt and puts j in a year.
- Net income for the year was a loss of 116 million. Net income is often called net profit or the bottom line, as it is the final number located at the bottom of the statement of profit and loss.
J. C. Penney is a perfect example of how important it is to look at the full financial picture. Although 12.5 in revenue appear on the surface of the billion dollars to be an impressive number, when calculating the cost of debt, the company incurred losses for the year. It should be noted that comparing the figures of financial and economic activities of any company works better compared to a few periods and against companies in the same industry.
The balance sheet shows what the company owns (assets) and debts (liabilities), as well as long-term investments. Investors scrutinize the balance sheet for guidance on how effective management of the company, using its debt and assets to ultimately generate income that is transferred to the statement of profit and loss.
Statement of profit and loss shows the financial health of the company, or the company is profitable. Income and expenses were closely monitored, as it is important for the management to increase revenue while keeping costs under control. For example, revenue might grow, but if the costs grow faster than profits, the company may ultimately incur losses. As a rule, investors and analysts pay close attention to the operating section of the statement of profit and loss statement to assess how effectively the company operates.
However, it is safe to say that both statements are the scrutiny of investors and analysts, as they provide a strong indication of the current state and prospects of any enterprise.
For a more in-depth look at the differences between these two important financial statements, please read the statement of profit and loss and balance sheet differ?
To explore our educational material on financial statements, please read Fundamentals of accounting: financial reporting, Advanced financial statement Analysis, and fundamental analysis: Introduction to financial statements.